RISK MANAGEMENT AND RISK-BASED COST ESTIMATION GUIDELINES August 2012
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NEVADA DEPARTMENT OF TRANSPORTATION RISK MANAGEMENT AND RISK-BASED COST ESTIMATION GUIDELINES The goal of this manual is to provide guidance to NDOT personnel and consultants in best practice methods of risk management and risk-based cost estimation. It is recognized that guidelines cannot provide entirely complete and practical guidance applicable to all situations and cannot replace experience and sound judgment. As such, deviations from these guidelines may, in some cases, be unavoidable or otherwise justifiable. Procedure for Guideline Revisions The guideline will be periodically revised or updated. For edits or updates, contact the Project Management Division at (775) 888-7321. All updates will be available on the Project Management Division SharePoint Portal which should be visited regularly for updated information. Responsibility: The Project Management Division is responsible for edits and updates to this document. Temporary Revisions: Temporary revisions will be issued by the Project Management Division to reflect updated/revised procedures. These will be reflected on dated errata sheet(s) posted on the Project Management Division SharePoint Portal. Scheduled Revisions: In October of each year, the Project Management Chief will assemble a Review Team for reviewing the guidelines and errata sheets to determine if a revised edition of the guidelines is required. The Project Management Division Chief will evaluate and approve the recommendations of the team for revisions to the guidelines. Risk Management and Page i
Foreword These guidelines address the first step in NDOT project management s vision of achieving statewide uniformity and consistency of project cost estimates and department-wide priority on estimating, managing, and controlling costs. Risk-based cost estimation and risk management involves the use of resources, including personnel that have the necessary knowledge, skills, and abilities to accurately and consistently predict costs. The future is uncertain, but what is certain is there are two questions that will be asked about our transportation projects: How much will it cost? and How long will it take? Risk-based estimates take a bottom-up approach as they analyze potential impacts on costs and schedule at the activity level. Quantified impacts are added to baseline costs to estimate a new, risk-adjusted, final cost. Impacts are quantified with probability distributions that, in turn, produce probability distributions of results. Consequently, the risk identification methodology is an alternative to traditional cost methods that apply top-down, uniform markups to base costs. Risk-based estimates provide a sound appraisal of project value by combining the two main pieces of the estimate; the estimated cost and the event risks. The first piece, the base cost estimate, is determined using traditional cost estimating techniques, except no contingencies or allowance are applied for the unknowns. The second piece comprises the contribution of event risks causing a project s outcome to change from the initial plan. The understanding of risks and uncertainty will better enable Project Teams in making decisions regarding project development and delivery. Risk Management and Page ii
Contents Foreword... ii Definitions of Selected Terms...vii Manual Organization...xi The Purpose of these Guidelines... xiii 1. Risk Management... 1 1.1 Accounting for Risk in Project Cost and Schedule... 1 1.2 Project Risk Management and Risk-Based Cost Estimation... 4 2. Cost Estimating Process... 5 2.1 Introduction... 5 2.2 Determine Estimate Basis... 6 2.3 Prepare Base Cost Estimate... 6 2.4 Review Base Cost Estimate... 7 2.5 Determine Risks... 7 2.6 Determine Estimate Communication Approach... 7 2.7 Conduct Independent Review and Obtain Management Endorsement... 7 3. Base Cost Estimate Methodology... 9 3.1 Introduction... 9 3.2 Base Cost Estimating Techniques... 9 3.3 Uncertainty...12 4. Base Cost Estimation and Project Development Level...15 4.1 Overview...15 4.2 Planning Phase...16 4.3 Environmental Phase...17 4.4 Final Design Phase...19 5. Important Factors Impacting Base Cost Estimation...21 5.1 Geographic Considerations...21 5.2 Quantity Considerations...21 5.3 Scheduling/Lead Time...22 5.4 Difficult Construction/Site Constraints...22 5.5 Methods of Payment...22 5.6 Timing of Advertisement...24 5.7 Specialty Work...24 5.8 Standard Items vs. Non-Standard Items...25 5.9 First Time Used...25 5.10 Geotechnical Conditions...25 5.11 Permit Conditions...25 5.12 Market Conditions...26 Risk Management and Page iii
5.13 Other Funding Sources/Agreement Work for Others...27 5.14 Project Delivery Methods...27 6. Base Cost Estimation Markups...29 6.1 Mobilization...29 6.2 Miscellaneous Item Allowance...29 6.3 Preliminary Engineering...30 6.4 Construction Engineering...30 6.5 Construction Contingency...31 6.6 Escalation...31 6.7 Application of Markups...33 7. Documentation/Basis of Estimate...35 7.1 Techniques...35 7.2 Basis of Estimate (BOE)...35 8. Project Schedule...43 8.1 Gantt Chart...43 8.2 Project Flowchart...44 9. Independent Estimate/Estimate Review...47 9.1 Internal Project Team...47 9.2 Peer Review...48 9.3 Division Review...48 9.4 External...48 10. Risk Management Planning...49 10.1 Introduction...49 10.2 Planning for Project Risk Management...50 10.3 Scheduling a Risk Analysis Workshop?...52 10.4 Other Risk Planning Suggestions...53 10.5 Risk Management Plan Implementation...54 11. Risk Identification...55 11.1 Inputs, Tools and Techniques, Outputs...55 11.2 Risk Identification Suggestions...57 11.3 Risk Register Guidelines...57 12. Qualitative Risk Analysis...59 12.1 How to perform Qualitative Risk Analysis...60 12.2 Levels of Impact...60 12.3 Helpful Hints for Qualitative Risk Analysis...62 13. Quantitative Risk Analysis...63 13.1 Types of Quantitative Workshops...63 13.2 Recommended Participants...66 13.3 How a Quantitative Risk Analysis is Performed...67 14. Risk Response & Value Engineering...71 Risk Management and Page iv
14.1 Risk Response: Actions...71 14.2 Risk Response Tools and Techniques...72 14.3 Value Engineering...74 14.4 Risk Allocation/Ownership...77 15. Risk Monitoring and Control...81 15.1 Documentation of Response Actions...81 16. Use & Reporting of Risk-Based Cost Estimation Results...85 16.1 Risk Reserve Approach...85 16.2 Risk Allowance Approach...85 16.3 Accounting for Schedule Risks...86 16.4 Frequency of Estimate Updates...87 16.5 Reporting of the Results...87 16.6 Risk-Based Estimate Management...88 Resources...89 Appendix A Basis of Estimate Template...91 Appendix B Sample Risk Elements...95 Appendix C Risk Allocation/Sharing...99 Appendix D Risk Breakdown Structure... 103 List of Figures Figure 1 Example of Risk-Based Probabilistic Cost Results... ix Figure 2 Assessment of Project Cost... xiii Figure 3 Project Cost... 2 Figure 4 Project Completion Date... 3 Figure 5 Cost Estimation Process... 5 Figure 6 Example of Unit Cost Uncertainty Ranges...12 Figure 7 Example of Quantity Uncertainty Ranges...13 Figure 8 Example of Total Cost Uncertainty Ranges...13 Figure 9 Example of Total Cost Uncertainty Comments...13 Figure 10 Example Application of Markups (w/uncertainty)...40 Figure 11 Example of a Gantt Chart...43 Figure 12 Sample Flow Chart...45 Figure 13 Assessment of Project Cost...49 Figure 14 Example Qualitative Risk Planning Spreadsheet...61 Figure 15 Example Qualitative Risk Planning Spreadsheet...61 Figure 16 Example S-curve of Construction Completion Date...64 Figure 17 Example Tornado diagram...65 Figure 18 Risk-Based Modeling Approach...68 Figure 19 Sample Risk Quantification...69 Risk Management and Page v
Figure 20 Risk Response Planning Chart...73 Figure 21 Value Engineering Job Plan...75 Figure 22 Comparison of Project Delivery Methods...79 Figure 23 Sample of Risk Response Section within Risk Register...82 Figure 24 Example schedule showing added risk...87 Figure 25 Example Reporting Cost Range...88 Figure 26 Example Reporting Schedule Range...88 List of Tables Table 1 Risk Management Process... 4 Table 2 Cost Estimation Methodologies... 9 Table 3 General Cost Estimation Ranges...15 Table 4 Applying markups within the Base Cost Estimate...33 Table 5 Summary of Project Activities from Flowchart...46 Table 6 Differences between Quantitative and Qualitative...59 Table 7 Example of Qualitative Percentages...60 Table 8 Include Risk Management Milestones in the project schedule....63 Table 9 Workshop Team (Typical Participants)...66 Table 10 Guide for Risk Allowance...86 Risk Management and Page vi
Definitions of Selected Terms Base Cost Estimate The base cost estimate represents the project cost that can reasonably be expected if the project materializes as planned and there is no occurrence of risk. The base cost estimate is unbiased and neutral - it is neither optimistic nor conservative. The base cost includes the known and quantified items and the known but not yet quantified (miscellaneous item allowance). The base cost estimate does not include any risks, unknown/unknowns or contingencies. NOTE: base cost estimates are to be prepared in current year dollars and will exclude future cost escalation. During the life of a NDOT project an estimate has many names: a) Engineer s Estimate initial estimate version b) Intermediate Review Estimate For intermediate design review meeting, and reflects 60% plan sets c) QA Estimate checking phase of plan set d) Final Engineer s Estimate for final design review meeting, and reflects 100% plan sets e) Preliminary Estimate reflects small sets, ready to send to EBS for advertising f) Agreement Estimate award of contract For the purposes of this document it will most often be referred as the base cost estimate or project estimate. Construction (CN) The cost of the construction contract. Construction Contingency A markup applied to the base cost estimate to account for uncertainties in quantities, unit costs, and minor risk events related to quantities, work elements, or other project requirements during construction. For design related contingencies see the definition of Miscellaneous Item Allowance. Construction Engineering (CE) The total construction management effort (cost) of taking a project from contract execution (through construction) to project completion. Cost-Based Estimation - A method to estimate the bid cost for items of work based on estimating the cost of each component (labor, materials, equipment, including contractor and sub contractor markups) to complete the work and then adding a reasonable amount for addressing a contractor s overhead and profit. Sometimes referred to as Productivity-Based Estimation. Cost Estimate - A prediction of quantities, cost, and/or price of resources required by the scope of an asset investment option, activity, or project. As a prediction, an estimate must address risks and uncertainties. Estimates are used primarily as inputs for budgeting, cost or value analysis, decision making in business, asset and project planning, or for project cost and schedule control processes. Cost estimates are determined using experience and calculating and forecasting the future cost of resources, methods, and management within a scheduled time frame. (Source: Copyright 2007, AACE International, Inc., AACE International Recommended Practices, Number 10S-90) CY Current Year Risk Management and Page vii
Escalation - changes in the cost or price of specific items or work over a period of time. Historical Bid-Based Estimation This type of estimation tends to be a straightforward count or measure of units of items multiplied by unit costs. These unit costs are developed from historical NDOT project bids (Bid Tabs) and may be modified to reflect project specific conditions. This is the most common type of estimating at NDOT. Impact Added cost, time, or scope to a defined project or loss of goodwill, image, trust, and respect due to a risk event occurring. Major Project - Based on the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), signed into law on August 10, 2005, a Major Project is defined as "a project with a total estimated cost of $500 million or more that is receiving Federal financial assistance." Miscellaneous Item Allowance - Sometimes referred to as minor items or design allowance, miscellaneous item allowance is typically meant to cover a variety of possible events and problems not specifically identified or quantified yet. It is also used to account for a lack of project definition during the preparation of planning and environmental phase base cost estimates. Often percentages are used as individual placeholders for items that have not yet been estimated. This item can also be used for right of way and utility relocation. Mobilization Calculated as a percentage of the total of the construction cost estimate, mobilization is included in a project estimate to cover a contractor s preconstruction expenses and the cost of preparatory work and operations (such as moving equipment on site and staging). Opportunity A risk event that can save time or money. Parametric Estimation A method to estimate the cost of a project or a part of a project based on one or more project parameters. Historical bid data is used to define the cost of a typical transportation facility segment, such as cost per lane mile, cost per interchange or cost per square foot. Historical percentages can be used to estimate project segments based on major project parameters. These methods are often used in early estimating, such as planning and scoping estimates. Preliminary Engineering (PE) The total effort (budget & cost) of taking a project through the Planning, Environmental and Final Design phases along with any design effort needed for construction support. The terms Design or Design Phase are sometimes used interchangeably with PE. Preliminary Estimate The Preliminary Estimate is typically the final estimate prior to letting. The project should have an accurate, complete Preliminary Estimate prior to going to advertisement. This is the best and final base cost estimate and includes all accepted risk up to this point in the development of the project. Revising a Preliminary Estimate during the letting period would be the exception, not the rule. However, bid period addenda changing the scope or cost of the work may require a revised Preliminary Estimate or reconciliation of the changed value to serve as part of the justification for award. Risk Management and Page viii
Probability - The likelihood or chance that something is the case or will happen. The theory is used to draw conclusions about the likelihood of potential events and the underlying mechanics of complex systems. Project A project is defined by the limits of the environmental document. Project Budget The base cost estimate plus the risk reserve. Total Project Cost The total project cost as defined by FHWA includes PE + R/W + CN + Utility relocations. Project Cost Range If a quantitative risk analysis has been performed the range is reported as 10 th percentile for the low estimate and 90 th percentile the high estimate. For qualitative risk assessments the range is reported as the base cost for the low estimate and the (base cost + (base cost * risk allowance)) for the high estimate. Right of Way Cost (R/W) The cost to acquire the right of way needed for the project. Utility relocation cost is not part of the R/W cost of the project. See the definition of Utility Relocations. Risk The combination of the probability of an uncertain event and its consequences. A positive consequence presents an opportunity; a negative consequence poses a threat. Risk-Based Cost Estimation Involves simple or complex modeling based on inferred and probabilistic relationships among cost, schedule, and events related to the project. Risk elements (opportunities or threats) are defined and applied to the base cost estimate with its uncertainties through modeling to provide a probable range for both project cost and schedule. 100% Probability of Not Exceeding 90% 80% 70% 60% 50% 40% 30% $688 $749 Risk Reserve $883 $1,053 Pre-Response Risk-Based Total Cost 20% Base Cost Estimate (2009 $) 10% $729 Base Cost Estimate (escalated) 0% $400 $500 $600 $700 $800 $900 $1,000 $1,100 $1,200 $1,300 Project Cost, Millions of Dollars Figure 1 Example of Risk-Based Probabilistic Cost Results Risk Management and Page ix
The risk-base cost estimate is reported using ranges and percentiles. Figure 1 details the probabilistic cost results of an example project. The 80 percent confidence interval, described by the cost range between the 10th percentile and 90th percentile figures reveals the project cost will fall between $729 million and $1,053 million. There is 70 percent likelihood that construction costs will not exceed $950 million (also referred to as the 70 th percentile). Risk Management Refers to the culture, processes, and structures directed toward effective management of risks - including potential opportunities and threats to project objectives. RMP Risk Management Plan Risk Reserve - An estimate of costs associated with the identified risks. Risk Statement A written statement that describes the future event and the impact caused by the event. Scope Changes - Changes in the requirements or specifications on which the design and estimate is based. Examples would include changes to project limits, work types, or capacity factors, such as traffic loads, vehicles per lane, or storm water factors. Threat A risk event that can cost time or money. Uncertainty - Uncertainty is the lack of knowledge and can be expressed as a range using numbers or percentages around any given value. Utility Relocation - The cost to relocate utilities within the project limits. YOE Year of Expenditure Risk Management and Page x
Manual Organization A brief synopsis of each chapter is provided below. Chapter 1, Risk Management project risk management is a scalable activity and should be commensurate with the size and complexity of the project under consideration. This chapter provides the required risk management process for projects over $100 million and suggestions on projects under $100 million. Chapter 2, Cost Estimating Process, offers background information and the fundamental concepts concerning the estimating process. Chapter 3, Base Cost Estimate Methodology, discusses the specific information that must be gathered in the first step of the process. Chapter 4, Base Cost Estimate and Project Development Level, the estimate for each level of project development has a specific purpose, methodology, and expected level of accuracy. Chapter 5, Important Factors Impacting Base Cost Estimation, many factors influence a project estimate. Several key factors are described in this chapter. Chapter 6, Base Cost Estimation Markups, markups such as mobilization, preliminary engineering (PE), miscellaneous item allowance in design (only for historical bid-based, costbased, and risk-based methods), and construction engineering (CE) applied to the base cost estimate. Chapter 7, Documentation/Basis of Estimate, documentation is a key element in good estimating practice. The estimate file should be a well organized, easy to follow history from the first estimate at the beginning of the planning phase through preparation of the final estimate. The basis of estimate document, described in this chapter, contains recommended organization, topics and format. Chapter 8, Project Schedule, provide guidance for the development of Gantt charts and flow charts for use within risk analysis. Chapter 9, Independent Estimate/Estimate Review, every estimate should have some level of review as determined by the Project Manager. Chapter 10, Risk Management Planning, provides guidance for the development of the risk management plan. Chapter 11, Risk Identification, this chapter contains guidance on how to identify and document risks. Chapter 12, Qualitative Risk Analysis, qualitative risk analysis assesses the impact and likelihood of the identified risks and develops prioritized lists of these risks for further analysis or direct mitigation. Risk Management and Page xi
Chapter 13, Quantitative Risk Analysis, addresses the objectives and guidelines for the risk assessment needed to conduct a quantitative risk assessment. Quantitative risk analysis uses a more detailed approach to evaluating and prioritizing risks by way of numerically estimating the probability a project will meet its cost and time objectives. Chapter 14, Risk Response & Value Engineering, discusses the development of risk response strategies and integrates the value engineering into the process of risk response for the purpose of reducing threats and enhancing opportunities to a project s cost and schedule. Chapter 15, Risk Monitoring and Control, after risk response actions have been implemented, these actions must be tracked and a record of their effectiveness and any changes to the project risk profile. Chapter 16, Use and Reporting of Risk-Based Cost Estimation Results, how the information gained from risk-based cost estimation will be used to assist us in project delivery. Risk Management and Page xii
The Purpose of these Guidelines Accurate estimation of the cost of transportation projects is a fundamental responsibility of the Nevada Department of Transportation. In recognition of the fundamental and strategic importance of cost estimating these guidelines provide consistent practices across the agency to enhance methods for meeting this responsibility. The purpose of the Risk-Based Cost Estimation and Risk Management Guidelines is to assist the Nevada Department of Transportation (NDOT) in achieving accuracy, accountability, and consistency in risk-based cost estimation and risk management efforts during the planning, environmental and design phases of project development. It provides guidance to NDOT Project Managers and Teams in their efforts to create accurate and consistent base cost estimates and to better manage the risks affecting project scope, schedule, and cost throughout the project development cycle. The base cost estimate is a living document. It moves up or down depending on a variety of factors over the life of the project. During each phase of project development, new information is uncovered and with each discovery the base cost estimate needs to be adjusted. Each of these revisions will use different estimating inputs, methods, techniques and tools. Planning Environmental Total Cost at Construction Completion 100% Design Letting Construction Completion Identified Risks & Unknown/Unknowns Risk Reserve Project (Cost) Known but not Quantified (Misc. Item Allowance) Known and Quantified Risk-Based Estimate Base Cost Estimate Project (Schedule) Figure 2 Assessment of Project Cost The base cost estimate for any project includes all of the known and quantified items along with the other items needed to construct the project but have yet to be fully identified (miscellaneous item allowance). As depicted in Figure 2, as the project progresses, the number of known and quantified items increases and the items that have yet to be quantified and risks decreases. Risk Management and Page xiii
When comparing risk-based cost estimation methodology to traditional approaches the differences are instead of applying a factor for all the unknowns, specific event risks are identified and quantified in place of these contingencies. NDOT has come to the understanding that an estimate is more accurately expressed not as a single number but as a range and to determine an accurate estimate range for both cost and schedule, risk must be measured. By using a risk-based estimation process Project Managers will have a clear understanding of project risk, both threats and opportunities, along with the variability or uncertainty within the base cost estimate. Project risk management is a scalable activity and should be commensurate with the size and complexity of the project under consideration. All projects, regardless of project size and project complexity, require some form of risk analysis and risk management planning. The framework of risk analysis remains the same, but the tools and level of effort vary with the risk analysis level. Simpler projects may utilize simple qualitative analysis. Larger more complex projects need to use more robust analysis techniques via Monte-Carlo simulation models. These guidelines will help identify procedures to increase the effectiveness in the following ways: Provide a consistent approach for determining and updating the base cost estimate for all projects including: o quantity estimation o unit pricing o uncertainty surrounding quantities and pricing o estimate(s) reviews o estimate(s) documentation o estimate(s) communication o management of estimate data Provide guidance on how to treat the common and recurring challenges encountered in the estimating process. Provide methodologies of developing more accurate and consistent ranges for project scheduling and cost estimating to help improve planning and project delivery. Increase Project Manager and Project Team member risk awareness. Provide a consistent methodology and ensure consistency in how risks are managed on NDOT projects.* Identify data requirements for risk analysis input and for output. Provide tools, techniques, and guidance for proactive risk management. * The methodology used in development of these guidelines is consistent with the Project Management Institute s (PMI) Project Management Body of Knowledge (PMBOK) process. The material contained in the following chapters does not provide how-to procedures with specific details on cost estimation practice or cost estimation management. However, this manual does provide the necessary knowledge and information for users to create and implement approaches that meet the requirements for managing project-specific cost and risk for NDOT projects. Risk Management and Page xiv
1. Risk Management 1.1 Accounting for Risk in Project Cost and Schedule Accounting for risk is critical to developing more accurate project estimates. Identifying possible risks and determining their potential impact will allow Project Managers to take into account factors that are not yet well defined but may ultimately influence project cost. Traditional cost estimating methods, whether being done as historical based estimates or costbased estimates, are forms of deterministic estimating practices, which take single point data and incorporate them into the cost estimate computations to determine a single value to represent the project cost estimate. The input data typically use average values, probable values, or other statistical representations. Project baselines are established or predicted based on available project knowledge. For example, engineering costs are developed based on anticipated scope, past experience, and assumed delivery method; construction costs are developed based on an anticipated design, allocating markups for known factors (e.g., 7% construction engineering), assumed quantities and unit costs; project schedule is developed based on an anticipated delivery method, probable milestones and past experience. However, as the project is developed, conditions may occur that will impact the base conditions for better (opportunities) or for worse (threats). The traditional way of dealing with project unknowns is to establish contingency or allowance factors for cost and schedule. In this method, the project adjusted baseline is expressed as base plus contingency. The contingency value is based on judgment, experience, and set of assumptions with unknown confidence. More often than not this method can under or over estimate the actual scope, duration, and cost. Traditional estimating practices tend to produce the number for a project. But this single number masks the critical uncertainty inherent in a particular project. It implies a sense of precision beyond what can be achieved during planning, scoping or early design phases. When comparing risk-based cost estimation methodology to traditional approaches the differences are instead of applying a factor for unknowns, specific event risks are identified and quantified in place of these contingencies and allowances. NDOT has come to the understanding an estimate is more accurately expressed not as a single number but as a range. To determine an accurate estimate range for both cost and schedule, risk must be measured. Project estimates should be comprised of three components: Base Cost Uncertainty Risk The base cost represents the cost which can reasonably be expected if the project materializes as planned. This base cost may include allowances for miscellaneous or minor items but it does not include any risks or contingencies. Unit bid prices can have a high and a low range. Quantities for a given item such as roadway excavation can have a high and a low range. This range of variability is called uncertainty. Risk-Based Cost Estimation & Page 1 Risk Management Guidelines August 2012
Once the base cost with its uncertainty has been established, a list of risks is created of both opportunities and threats, called a risk register. The risk assessment replaces general and vaguely defined contingency with explicitly defined risk events and with the probability of occurrence and consequence of each potential risk event. Risk events are characterized in terms of probability of occurrence and the consequences of each potential risk event. Risk-based cost estimation methods involve simple or complex analysis based on inferred and probabilistic relationships between cost, schedule, and events related to the project. It uses a variety of techniques, including historical data, cost-based estimating, and the best judgment of subject matter experts for given types of work, to develop the base cost (the cost of the project if all goes as planned). Risk elements (opportunities or threats) are then defined and applied to the base cost through either qualitative or quantitative analysis. The use of quantitative techniques, such as Monte Carlo simulation, can be a powerful tool for analysis of project risk and uncertainty. This technique provides project forecasts with an overall outcome variance for estimated project cost and schedule. Probability theory allows us to look into the future and predict possible outcomes. In this approach the impact of individual risks are combined to determine a project adjusted baseline based on a quantified percentile or confidence level (e.g., 70% probability of success). A risk reserve is then established as the difference between the baseline and 70% probability. For additional details on risk reserve and allowances see Chapter 16. Use and Reporting of Risk-Based Cost Estimation Results. A key by-product from risk-based cost estimation is that the NDOT management may be engaged early in the project development phase to offer guidance on how best to account for sensitivities and risks for the project and to provide direction on the confidence that project cost or schedule will meet specific outcomes. For example, Figure 3 is a graphical representation of a given project cost (horizontal axis) to its likelihood of not being exceeded (vertical axis) 100% 90% 80% $688 $749 $1,053 Probability of Not Exceeding 70% 60% 50% 40% 30% $883 Pre-Response Risk-Based Total Cost 20% Base Cost Estimate (2009 $) 10% $729 Base Cost Estimate (escalated) 0% $400 $500 $600 $700 $800 $900 $1,000 $1,100 $1,200 $1,300 Project Cost, Millions of Dollars Figure 3 Project Cost Risk-Based Cost Estimation & Page 2 Risk Management Guidelines August 2012
100% 90% 80% Jul-2013 8/2/15 Probability of Not Exceeding 70% 60% 50% 40% 30% 20% 7/1/14 Pre-Response Risk-Based Completion Date 10% 5/27/13 Baseline Completion Date 0% Nov-2010 Apr-2012 Aug-2013 Dec-2014 May-2016 Sep-2017 Completion Date Figure 4 Project Completion Date Figure 4 is a graphical representation of a given project completion date (horizontal axis) to its likelihood of not being exceeded (vertical axis). The use of such graphics permits NDOT management to quickly understand the nature and magnitude of risks to determine their risk tolerance so that effective decisions are made at the appropriate management level, rather than at lower staff levels where cost and schedule estimates are often performed. Risk Management is needed to: Help projects avoid exceeding scope, schedule and budget, Provide transparency to the project development process Add creditability to the process so decision makers understand how the project scope, budget and schedule is derived. The risk-based cost estimation assists project development by: Encouraging pro-activity and early planning Building confidence and credibility in the project s plans and estimates Developing targeted mitigation strategies for all anticipated threats Allowing better allocation of risks and identification of project delivery methods Allowing transparency, integrity, and accountability throughout the life cycle of the project Maximizing the likelihood of meeting on-time, on-budget goals Risk-Based Cost Estimation & Page 3 Risk Management Guidelines August 2012
Project Managers must understand risk tolerance and then must weigh the value of project decisions with the risks associated with the project. NDOT, as stewards of the public trust, must endeavor to inform decision-makers of the risk associated with the projects developed. Lastly, projects over $100 million are typically designated by the Federal Highway Administration (FHWA) as major projects, which require that special attention be given to the preparation of the total program cost estimate. In January 2007, FHWA issued cost estimating guidance for major projects. The document, titled Major Project Program Cost Estimating Guidance, calls for rigorous, transparent cost estimating accounting for project risk and uncertainty. The processes and procedures outlined in these guidelines are intended to meet FHWA s requirements for the Cost Estimate Review (CER) process. 1.2 Project Risk Management and Risk-Based Cost Estimation Project risk management is a scalable activity and should be commensurate with the size and complexity of the project under consideration. Simpler projects may utilize simple qualitative analysis. Larger more complex projects need to use more robust analysis techniques via Monte-Carlo simulation models. A project is defined by the limits as defined in the environmental document. Projects are often implemented over a number of years and may involve numerous individual elements and segments. These individual segments may be progressed as individual contracts but, in total, they make up the project. It is the policy of the Nevada Department of Transportation to conduct risk-based cost estimating workshops for all projects over $100 Million (PE, R/W and Construction). These workshops provide information to Project Managers that can help them control scope, cost, schedule, and manage risks for all projects. This policy reaffirms the requirement that a risk management plan is a component of every project management plan. For projects up to $100 million dollars, the Project Team can use a qualitative risk analysis approach in conjunction with a risk register. Table 1 provides the required and suggested risk management process based on project size. Project Managers are encouraged to use the suggested process on projects that have complicated elements or other high-risk items. Project Size ($) Required Process Suggested Process < $10 M Qualitative Assessment Qualitative Assessment $10 M to $25 M Qualitative Assessment Informal quantitative workshop using the NDOT Risk Tracking and Analysis Tool for Small and Medium Size Projects $25 M to $100 M Qualitative Assessment Cost Risk Assessment (CRA) > $100 M Cost Risk Assessment (CRA) N/A Table 1 Risk Management Process Risk-Based Cost Estimation & Page 4 Risk Management Guidelines August 2012
2. Cost Estimating Process 2.1 Introduction All projects benefit from following a thoughtful and deliberate process in developing project cost estimates. The process adopted from the Washington State DOT and presented in Figure 5, describes the way NDOT develops its base cost estimates for projects over $100 million. It is applied to all levels of project delivery, starting with the planning level scoping estimate and ending with the final project plans, specification, and estimate. Figure 5 Cost Estimation Process Risk Management and Page 5
Each level of estimate may require different estimating inputs, methods, techniques and tools. Projects over $100 million by nature can take many years to complete the design. During this time the estimate needs to be updated according to the timeline set forth in Section 16.4 Frequency of Estimate Updates. The task of cost estimating, by its very nature, requires the application of prudent judgment to the completion of the task. A short description of each step in the cost estimating process is presented below. 2.2 Determine Estimate Basis This activity focuses on obtaining project information, including all previously developed project scope and schedule details and data, from which a project cost estimate can be prepared. The level of scope detail varies depending on the project phase, project type, and project complexity, but would include the design matrix and criteria, all assumptions and pertinent scope details. The estimate basis should be clearly documented, with the end result being a complete traceable history for each estimate. This documentation is covered in detail in Chapter 7. Documentation/Basis of Estimate. 2.3 Prepare Base Cost Estimate This activity covers the development of estimated costs for all components of a project, excluding future escalation. These components may be estimated using different techniques depending on the level of scope definition and the size and complexity of the project. The number and detail of components estimated may vary depending on the project development phase. For example, in the planning phase the NDOT WIZARD tool is typically used for estimating. This tool uses parametric estimating techniques along with percentages for contingencies or risk. As the design progresses into the environmental and final design phases and more details about the project are known, items within the estimate become more exact. Key inputs at this point in the delivery of the project include a more detailed scope, historical databases and other cost databases, knowledge of market conditions, and use of escalation rates. NDOT has internal specialty groups that should be used to provide estimate information when preparing base estimates. This documentation is covered in detail in Chapter 3. Base Cost Estimate Methodology. A required component of any estimate is the preparation of a Basis of Estimate document describing the project and including underlying assumptions, cautionary notes, and exclusions. The base cost estimate should also be based upon, and include as an attachment for reference, the associated schedule for all remaining project activities. During the planning phase, the project schedule will be cursory and very general in its coverage. However, as a minimum it should include the major milestones NDOT uses to measure performance and progress on projects. The planning phase schedule may only include a few activities, but should begin with the development of the project, and include right-of-way, design, and construction. NOTE: All base cost estimation is done in current year dollars. Risk Management and Page 6
2.4 Review Base Cost Estimate This activity is necessary to ensure: 1) assumptions and basis are appropriate for the project, 2) the base cost estimate is an accurate reflection of the project s scope of work; 3) scope, schedule and cost items are calculated properly and required components are not missing or double counted; and 4) historical data, the cost-based estimate data, or other data used reasonably reflects project scope and site conditions. NDOT Specialty Groups and/or subject matter experts (SMEs) must participate in reviewing the base estimate. See Chapter 9. Independent Estimate/Estimate Review. 2.5 Determine Risks This activity is part of developing a risk management plan for a project, and is an integral component of project management planning process. Risk management is an active and ongoing process of maximizing the probability and consequences of positive risk events (opportunities) and minimizing the probability and consequences of negative risk events (threats) to the project objectives. In the context of cost estimating, the cost impact of project risks (whether opportunistic or a threat) must be included to derive a total project cost. This is required for all projects over $100 million and suggested for projects under $100 million. Formal or informal risk assessment techniques are a valuable and valid tool and should be applied to all estimates. This documentation is covered in detail in Chapter 11. Risk Identification. 2.6 Determine Estimate Communication Approach Cost estimate data is communicated to both internal and external constituencies. The communication approach determines what estimate information should be communicated, who should receive this information, how the information should be communicated, and when the information should be communicated. Cost estimate information should be included when the communication plan is developed as part of the project management process. Often the words are as important as the numbers. The Basis of Estimate (BOE) document can be used effectively as a communication tool to convey key information about the project to others. See Chapter 7. Documentation/Basis of Estimate. 2.7 Conduct Independent Review and Obtain Management Endorsement Base cost estimates are key products of the project management process and are fundamental documents upon which key management decisions are based. Given their importance, all base cost estimates should receive an independent review and then be reconciled and revised as needed to respond to independent reviewer comments. Once independent review comments have been satisfactorily incorporated, estimates should be presented to management staff for approval. See Chapter 9. Independent Estimate/Estimate Review of this manual. Risk Management and Page 7
Management approval of estimates developed for initial budgeting or baseline definition is a defined step in the project management process. Revised estimates, typically developed if project requirements change, or as design is developed, should also be reviewed by management staff, revised as necessary to reflect management comments, and then approved. Each revised estimate shall then be incorporated into project cost baselines through the established project change management process. Risk Management and Page 8
3. Base Cost Estimate Methodology 3.1 Introduction NDOT s vision for risk-based cost estimation and risk management calls for well-documented and complete base cost estimates. To accomplish this, estimates need to have clearly spelledout assumptions and risks that can be easily communicated. The key to realizing this vision is a universal understanding of all components of a project s base cost estimate. Estimation methodologies fall into one of four categories: parametric, historical bid-based, costbased or risk-based. These categories encompass many individual techniques/tools to aid in preparing cost estimates. It is important to understand that any combination of the methods may be found in any given estimate as shown in Table 2. Project Development Phase Planning Environmental Final Design Purpose of Estimate Conceptual Estimating Budget Authorization (Establish baseline cost for project) Early Design Estimates Design Estimates (Project Control of Scope, Schedule, Budget) Final Engineer s Estimate (100% Design) Preliminary Estimate (Ready for Advertisement Table 2 Cost Estimation Methodologies Methodology Similar Projects Parametric Historical % Risk-based Parametric Analogous Projects Historical % Risk-based Parametric Analogous Projects Historical bid-based Risk-based Historical bid-based Cost-based Risk-based Historical bid-based Cost-based Risk-based As shown in Table 2 risk-based cost estimation can happen at any time during the project development process. 3.2 Base Cost Estimating Techniques Cost estimating begins when a project enters into the planning level scoping phase of project development. However, estimating occurs throughout the other design phases of project development. Early cost estimating is critical, as this is the time when the baseline project definition, cost, and schedule are determined. Base cost estimating techniques must produce consistent and accurate estimates. However, the use of cost estimating tools will vary depending on the level of project definition, the project type, and complexity of the project. Risk Management and Page 9
Computer software such as the NDOT Wizard Tool is often used to facilitate application of these types of estimating techniques. There are a variety of techniques that can be used to support cost estimating, which can be summarized as follows: Estimation based on Analogous or Similar Projects: This technique relies heavily on one project very similar to the project being estimated. The reference (analogous or similar) project is typically one previously constructed, is currently under construction, is bid for construction, or has a completed final design level estimate. Items, quantities, and unit costs from the similar project are used as a basis for estimating the current project. Similar costs from the reference project can be used to estimate other groups, categories, elements, and items of total project cost. Parametric Estimation: Parametric estimation techniques are primarily used to support development of scoping or early design estimates where very little project definition is available. Major project parameters are identified. Statistical relationships and/or non-statistical ratios between historical data and other parameters (e.g., tons of asphalt, square foot of bridge deck area) are used to calculate the cost of various items of work. The length, width, and depth (LWD) is a type of parametric estimating. Typically the historical bid prices used to develop the estimate come from previous projects awarded by NDOT. NOTE: The NDOT Wizard tool uses parametric estimation techniques to assist in creating estimates during the Planning Phase of a project. Cost-Based Estimates: This technique relies on the estimating approach wherein construction costs, based on a selected productivity, are estimated for labor, material, equipment, contractor overhead, and contractor profit for each major item. This approach typically produces an accurate estimate and is useful in estimating unique items of work where there is insufficient bid history. The application of cost-based estimating during Scoping and Design would be similar to that used during Letting. Estimates of other groups and/or categories of total project cost are estimated from the bottom up. This means that resources associated with certain groups or categories, such as project development and detailed design, are specifically identified for elements and tied to when these resources will be engaged on the project (i.e., a period of time a lead designer will work on a project). Cost-based estimate methods do not rely on historical NDOT bid data, but rather are based on determining, for an item or set of items, the contractor s cost for labor, equipment, materials and specialty subcontractor effort (if appropriate) needed to complete the work. A reasonable amount for contractor overhead and profit is then added. This method is preferable on unique projects or where geographical influences, market factors and volatility of material prices can cause the use of historical bid-based methods to be unreliable. Also, since contractors generally utilize a cost-based estimating approach to prepare bids, this method can provide more accurate and defensible costs to support the decision for contract award/rejection and to support any future price negotiations with the contractor after contract award. Risk Management and Page 10
Cost-based estimates require significant effort, time, and estimator experience to prepare. They should be limited to those items that comprise the largest dollar value of the project, typically that 20% of items of work that account for 80% of project cost. The cost of the remainder of estimate line items can be determined using historical bid-based estimate methods. This approach provides for a more efficient use of estimating resources and reduces the total time and cost of preparing cost-based estimates. Cost-based estimating is also a good way to check a few large items of work in a historical bid-based estimate to ensure that the historical prices are still valid. Historical Bid-Based Estimation: The use of historical unit cost bid data from recently bid contracts is the most common estimation approach. Under this approach, bid data are summarized and adjusted for project conditions (e.g., project location, size, quantities, etc.) and the general market conditions. Items are developed for major elements of work so quantities and historical unit prices can be applied to these items. Early on, during the Planning and Environmental Phases, percentages (Miscellaneous Item Allowance) are used to estimate items where little or no definition is available. Historical bid-based methods are commonly used and are appropriate when design definition has advanced to the point where quantification of units of work is possible. These methods apply historical unit costs to counts or measures of work items to determine a total cost for the item or project. The unit cost data used is typically received by NDOT in bid documents from prior projects and should be modified or adjusted to reflect current prices (escalate to current time) and project specific conditions such as geographic location, quantity of item needed, and the scheduled timing of project advertisement. See Chapter 5. Important Factors Impacting Base Cost Estimation later in these guidelines. Historical cost data sources include: Integrated Project Development System (ipd) Bid Tabs Pro by Oman Systems RS Means, when NDOT specific unit costs are not available (this tool can be used for both historic bid-based and cost-based methods) NOTE: It is important to remember unit bid cost data from past projects carries with it all of the adjustment from the various factors discussed in Chapter 5 along with any risk associated with that item. Very high and very low unit bid prices should be reviewed prior to acceptance. Estimation based on Historical Percentages: This technique is used in conjunction with other tools such as historical bid-based estimating. Historical percentages are used to estimate costs for items within an element not typically defined early. A percent is developed based on historical cost information from past projects to cover certain items comprising an element. This percentage is based on a relationship between the sum of the selected items and a total cost category such as direct construction. Historical percentages are used to estimate other groups and/or categories of total project cost. Risk Management and Page 11